Unpacking Financial Overhaul And Consumer Protection

The financial overhaul plan that President Obama signed into law this week was billed as protection for the nation against a future economic catastrophe, and for consumers against dishonest financial industry players and practices. Host Michel Martin is joined by financial advisor Lynette Khalfani Cox for a closer look at what the overhaul law will mean to the most vulnerable consumers.

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MICHEL MARTIN, host:

President Obama signed a couple of pieces of important legislation into law this week. I just talked about that a minute ago. We'll focus on one of them. It's called the Dodd-Frank Wall Street Reform and Consumer Protection Act. This bill could take years before its provisions are fully felt, but make no mistake, change is coming for Wall Street, retail, banks and consumers. It's all about how they're going to handle money.

We're going to drill down on several of the key components and talk about how that will affect consumers.

To do that, I'd liked to welcome back Lynnette Khalfani Cox. She writes about matters of personal finance, she's also an author and a columnist and she's been following this legislation closely.

Welcome back. Thanks for joining us.

Ms. LYNNETTE KHALFANI-COX (Author, "Zero Debt: The Ultimate Guide to Financial Freedom."): Thank you for having me back.

MARTIN: So tell me, what do you think is the most important provision in this bill for consumers?

Ms. KHALFANI-COX: I think really, the single most important factor is the creation of this Consumer Financial Protection Bureau. That's going to be the watchdog agency that looks after you and I when we engage in any kind of financial transaction, particularly consumer lending. This new bureau is going to be extremely powerful, because its going to have the ability to not only write new laws and policies concerning consumer lending, but also enforce those.

And it covers pretty much everything: mortgages, credit cards, payday loans, what goes on at check cashing places. So it really will have sweeping authority and an advocate on the side of the quote/unquote "little guy," I think is something that a lot of people have been looking forward to.

MARTIN: Youve written about the fact that people of color tend to disproportionately use so-called non-traditional banking institutions like payday loans, those are covered by this bureau. But it doesnt regulate car loans. Do I have that right? Auto loans.

Ms. KHALFANI-COX: Youre correct. And...

MARTIN: And that's something that a number of advocates for consumers have been concerned about, but also people in the military, for apparently military service personnel often have difficulties around car loans, in part, because they move a lot and things of that sort. So do you think that's a significant oversight?

Ms. KHALFANI-COX: I do. And I would've liked to have seen car loans included in this legislation. Ah, obviously you can't always get everything you want. Nevertheless, I think that there were so much advocacy done. There was so much that was included that the bill is definitely a win for consumers. But I certainly agree, you know, besides a home, which will probably be for most people the single largest purchase that consumers will ever make in their lives, a car really does rank right up there. The typical car loan now tops $25,000 or $30,000. And increasingly, car loans are being extended.

You know, I remember when car loans were three, four, maybe five years. Now they are, its very common to have six and seven-year loans. I call them so-called car mortgages. So I think we do need a little more protection in that area. The industry successfully fended off the inclusion of car loans in this reform bill, essentially saying well, weve already got a system of checks and balances in place. I expect though that some of that will be revisited in the future.

MARTIN: You mentioned that the mortgage or a home is for many people the largest investment that they have. President Obama was interviewed on ABC's "Good Morning America" today. He talked about how the bill he says, will help those in danger of losing their homes to foreclosure or how it will address the foreclosure crisis, which, as we know, played such a large role in the country's sort of economic turmoil at the moment.

Here's what he had to say.

(Soundbite of TV show, "Good Morning America")

President BARACK OBAMA: On the mortgage front, we're going to be able to make sure that mortgage brokers are not steering you towards a more expensive mortgage because they're getting a hidden kickback from the mortgage issuer. There's going to be a standard of care, meaning that mortgage brokers have to operate in an honest and transparent way with you and if they don't, they're going to be subject to penalties.

MARTIN: You know, Lynnette, the argument about - well, first of all, I wanted to ask if you think that's true. If you think that the bill does enough to prevent another crisis like the one that we are now experiencing? That's the first question. The second question I had for you is how do you think the efforts to stem the foreclosure crisis are going to this point?

Ms. KHALFANI-COX: I think the bill will help to avoid some of the problems we saw during the housing boom and the subsequent mortgage meltdown. For example, what President Obama was referring to was a certain commission that gets paid to brokers - to mortgage brokers. It's a technical term. It's called yield spread premium, but essentially it's a commission, a fee that was paid by lenders to mortgage brokers whenever those mortgage brokers steered, essentially, customers into higher cost loans.

In other words, you might have had a great credit rating and qualified for a loan in the past, say two or three years ago, a loan that was, you know, six percent interest back then. But because the mortgage broker steered you into a loan that had a 6.5 percent interest rate or maybe even a seven percent interest rate, they got thousands of dollars in quote-unquote "kickbacks," that's what the president was referring to, from the lender because the lender knew that over the life of a 30-year loan the fact that youre paying seven percent instead of six percent means that the lender was going to get thousands and thousands and thousands of more dollars out of you. So the law addresses that issue...

MARTIN: Okay.

Ms. KHALFANI-COX: ...in terms of eliminating those commissions.

MARTIN: And I do want to mention that we are not addressing here the argument that some made that these new regulations will actually limit options for credit to people who might like to have them. We dont have time to address that particular argument here.

But finally Lynnette, before we let you go, I want to ask, how will the new law change the way many people shop, specifically, the use of debit cards and credit cards for small purchases?

Ms. KHALFANI-COX: Well, it's going to encourage people to use cash, debit cards or checks more frequently. And the reason is that retailers are going to be able to offer you a discount for making essentially cash purchases. So the folks who are still whipping out the Visas and the MasterCards to pay with plastic won't get those discounts. And also the new law will give retailers the ability to impose $10 minimums whenever you do use a card.

So, you know, you won't be able to just run into Starbucks and pay $5 for a latte or whatever using that card. You'll have to have a $10 minimum. So that is going to change some people's spending habits, because so many people are used to using plastic as a convenience, even if it's for just small purchases.

MARTIN: Lynnette Khalfani-Cox is a personal finance columnist and author "Zero Debt: The Ultimate Guide to Financial Freedom." She joined us from Newark.

Lynnette, thank you.

Ms. KHALFANI-COX: My pleasure.

(Soundbite of music)

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